Is Nvidia Stock Too Cheap?
Question: Why would an investor pay 30 times earnings for Amazon stock (NASDAQ: AMZN) when Nvidia stock is trading at 33 times earnings? It wouldn't make much sense, especially when considering these three key points:
Some might consider Nvidia a 'safe haven,' but its track record during market downturns tells a different story. For example, Nvidia stock dropped more than 65% during the 2022 inflation crisis. In 2020, amid pandemic uncertainty, the stock fell over 35%. Most significantly, during the 2008–2009 financial meltdown, Nvidia shares plummeted by 85%. Clearly, NVDA isn't a safe stock. For more detail, see our dashboard How Low Can NVIDIA Stock Go In A Market Crash? along with analysis of previous market crashes.
That said, Nvidia's stock has already seen a considerable correction, falling from nearly $150 at the start of the year to below $100. For investors looking for a potentially steadier, high-performing approach, the Trefis High Quality portfoliomay be worth considering. This strategy has delivered over 75% returns since inception, as shown in its HQ performance metrics.
If you believe in the continued rise and expansion of Artificial Intelligence, Nvidia could be an attractive long-term play at current valuation levels. Nvidia essentially serves as an 'arms supplier' in the AI arena. Investing in Nvidia is not a bet on any one player like OpenAI, Google, or Amazon, but rather on the backbone that supports them all. The AI race is still developing, and companies are pouring in resources. For example, Google's infrastructure-related capital expenditure is approximately $75 billion, showing the scale of the investment.
Despite the optimism, Nvidia does face risks. Earnings could fall short of expectations, or growth might slow from 50% to around 30% as businesses tighten spending. Additionally, clients might pursue more efficient AI models, lessening the need for Nvidia's chips. Unpredictable events could also negatively impact the stock. These factors suggest that downside risk—as much as 40%—is possible. Selling during such dips could hurt investors more than holding through volatility.
Nonetheless, for long-term investors with a 3-5 year outlook who can tolerate swings, Nvidia at today's levels may be a compelling entry into the AI revolution. Those interested in navigating downturns or potentially gaining from them might look into the Trefis Reinforced Value Portfolio, which has beaten its all-cap benchmark (a combination of the S&P 500, S&P mid-cap, and Russell 2000 indices). Consulting with a financial advisor experienced in bear markets may also be wise. Remember, many fortunes are built by those who stay calm and strategic in volatile markets.
AMZN & NVDA Return Compared With Trefis Reinforced Portfolio
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